The Trading Professional

Tuesday, March 2, 2010

In my last post I spoke about a GBP/CHF trade that was not looking good. As you will see from the below chart, the pair came back and hit the weekly pivot later in the same day. A very profitable trade for me. This is an example of the volatility this type of trading can have. Very, very profitable when it works, but when it goes bad, it goes very bad. 1100 net pips for the trade. I'll take that any day.

Tuesday, February 23, 2010

In the chart below you will see a trade I have currently in place. This trade is an example of the scary nature of trading pivots the way I do them. When things go right, you can make thousands of pips. When they go bad though, you can lose your account. Here is how this trade breaks down. The weekly pivot is 1.6729. I stacked 10 orders below the pivot, each 10 pips apart. The first at 1.6719, then 1.6709, 1.6699, etc. until I had 10 buy stop orders ready to go.

On Monday, the price spiked up and opened all of my positions but one. The price then fell somewhat putting my account negative for a while. Then early this morning (Tuesday), the price spiked up again and missed the weekly pivot by 1 pip. Yes, 1 pip, then fell like a stone and nearly margined my account before coming back somewhat. Now, this trade may yet work out. If you've looked at the way price moves in relation to the pivot point you'll know that it very often comes in contact with the pivot more than once. So I'm riding this out. But this is an example of why this trading method is not for everyone. It can be volatile and frightening. If you fear losing your account, don't trade this way. We'll see how the trade works. I'll report when it closes.

Tuesday, February 2, 2010

The chart below shows the GBP/JPY hourly. I've noted the weekly pivot point at 144.80. I traded this pair by stacking positions at the open of the week on Sunday night. The pair opened at 143.28 and I started stacking my positions at 144.70 with a limit order to sell at the pivot, 144.80. I added an order to buy at 144.60. 144.50, 144.40, etc., all the way down to 143.80. I like to keep 50 pips or so between the price and my most recent order to give the price a chance to move before opening my positions. I opened up 10 orders at 10 pip intervals each for two units (for example, I trade in 5 mini lot units so each order set above was for 1 standard lot). Over the next few hours half of those positions opened up, then the price fell back to just about the 143.00 level. I used that drop to add 3 additional one unit positions down to 143.50 (I'll discuss stops and why I do not use them with this trading style in a separate post - for now, suffice it to say that margin call is my stop loss in this account).

Starting at about 0600 EST on February 1 the price for this pair started moving up and continued up until the weekly pivot was hit during the 1900 EST hourly bar. On this trade I made 1,460 total pips (counting 130 pips for the last order, 120 for the second to last order, 110 for the third to last, then 200 for the first two unit order [100 pips x 2 for the 2 units traded]). Not bad for a trade that opened and closed in less than one day.

I will deal with the issue of stops and account size in a later post. This has been a very profitable trading method for me. I use it almost every week and have seen great gains. But a word of caution: I spent several months back testing this method before I put a dime of my own money behind it. I suggest that you do the same. It is a volatile trading methodology and will have big moves in both directions. If you trade using too much margin you will suffer losses. Become comfortable with it before you use it and it will, I hope, be as good to you as it has been to me.

Tuesday, January 26, 2010

Let's go back to January to illustrate how I trade the weekly and monthly pivots. The chart below shows the GBPJPY from the first week in January of this year. The trading system is very simple (as most of the good things in life are).

The key is to trade the pair to the pivot. In the example above, I traded two sets of stacked trades, one down to the weekly pivot point and one stack down to the monthly pivot point. My stacks are simply one trading unit each 10 pips above the pivots. I stack no more than 20 positions on any pivot trade and I trade two units for the first 10 positions and 1 unit for the second 10 positions. In the above trade, for the weekly pivot, I had 10 two unit orders and 2 one unit orders. For the monthly pivot, I had the full 10 orders for two positions and 10 orders for one unit. Both closed profitably (weekly on Jan. 4 and monthly on Jan. 5) for a total of 1330 pips on the weekly trade and 2650 pips for the monthly pivot trade (the total pips were actually 3864.8 for both trades due to the spread and slippage).

The key to any consistent trading system is to find something that reoccurs more often that it does not and to take advantage of it. Look at the pivot trades for the GBPJPY for the last several years and you'll see what I mean. More on this later.

Wednesday, January 13, 2010

As I indicated in my earlier post, I have changed the focus of my trading from straight support and resistance to a pivot point based system. What are pivot points? Pivot points (or as I sometimes call them, Pivots) are simply mathematically derived price points based on the previous period's price movement. The simple calculation for pivots for any period is to add the High, Low and Close for the previous period, and divide by three. The result is the pivot point for the current period. For example, if you are trading the GBP/JPY and are looking for today's daily pivot, you would look at yesterday's High, Low, and Close, add them together and divide by three (High=148.63, Low=146.64, and Close=147.33). In this case the calculation would result in a daily pivot point of 147.53.

What is the significance of the pivot? Quite simply, the price in a given period almost always hit the daily pivot (or comes very close). It seems as if the price of a currency pair is drawn to the pivot point. Missed pivots are rare and can themselves give rise to great trading opportunities. The way I'm trading now, for the most part, is by placing orders from the pivot point toward the current price when, on a weekly or monthly timeframe, the pivot has not yet been hit.

The order style I use is also different than the way I was trading support and resistance before. Where I would enter into a single position for and S/R trade and have a stop loss that trailed behind the price as it moved toward my profit target (a legitimate way to trade by the way), now I stack orders from the pivot point toward the price. For example, using the GBP/JPY as an example, if the weekly pivot were at 147.50 and the price was below the pivot at 146.00, I would place a buy order, starting at 147.40 every ten pips down toward the current price. I leave a little room for the price to move so that the chance of an order opening while the price is moving away from me is minimized. So, in this example, I would place 10 orders, 10 pips apart from 147.50 to 146.50 with the pivot as the profit target. Then I would wait.

That is it. That is the trading style I use most often now. I intend to post the trades I'm making here so that those of you who care to can follow along. I will also post a few additional trading tips this week so that the trading style makes more sense. I'll be talking about stops and losses in the next post.

One very important thing I need to say before signing off today is that I've spent the last 6 months or so backtesting this trading style and trading small lots to see how it works in real money situations. I encourage you to do the same. Never take someone else's word that a system works. There are plenty of tools for backtesting out there. Take the time to test these ideas, then try them using small lots. Only when you are convinced that they will work for you should you commit significant resources.

Thursday, January 7, 2010

Greetings fellow traders. I want to say thanks to those who have emailed me in the last 3 or 4 months. I've been on a break since about September (not from trading, only from blogging), but have solved some of the issues that have kept me from the keyboard - more on that later.

I will be starting to post again, but with a different accent on trading. Up until now, its been support and resistance, which is a fine and profitable way to trade. For the last six months or so though, I've been working and testing a new trading method related to pivot points. I'll share with you what I've learned and discuss trades as they develop.

Again, sorry for the hiatus. There was just no other way for me to do what I needed to do.

Saturday, September 5, 2009

When you trade in the Forex Market, you will trade "Currency Pairs". This is the source of a lot of initial confusion for new traders. "Why Pairs? Why can't I just trade Dollars, or Euros or Francs?" is a question you hear often. The answer is easy, every exchange on the Forex Market (or at any border exchange kiosk for that matter) involves two different currencies. You are trading US Dollars for Canadian Dollars, British Pounds for Euros, Euros for Japanese Yen, Australian Dollars for Mexican Pesos or one country's currency for another's. This exchange is done on the Forex Market by trading currency pairs. For instance, when you are trading the EUR/USD pair, you are exchanging Euros and US Dollars. If you believe that the Euro is going to strengthen against the US Dollar, you buy the pair. If you believe that the US Dollar is going to strengthen against the Euro, you sell the pair.

In each pair, the first pair is the primary currency, or the currency against which the other is denominated. This means that in any quote for the EUR/USD, the EUR number is always 1. So if the quote for the EUR/USD is 1.3547, that means that it takes 1.3547 US Dollars to purchase 1 Euro. If you are following the USD/JPY and the quote is 112.58, that means that it takes 112.58 Japanese Yen to purchase 1 US Dollar. For the GBP/CHF, if the quote is 1.5128, it takes 1.5128 Swiss Francs to purchase on British Pound. You get the idea.

When you are "buying the pair" you are, in effect, borrowing the second currency to buy the first. So, if you are buying one standard lot of the EUR/USD, and the quote is 1.3547, you are borrowing USD $135,470 in order to purchase €100,000. Your hope is that the Euro will strengthen and you will sell your Euros and get more US Dollars for them. For example, if the pair rises to 1.3850 and you sell your position, you will get USD $138,500 for the €100,000 you bought. After repaying the loan of USD $135,470, you will net USD $3,030, which is your profit for the trade. To give an example of how the other side would work, if you think that the Australian Dollar is going to weaken against the Japanese Yen, then you would sell the AUD/JPY pair. Suppose that the quote for the pair was 71.60 (meaning that 1 Australian Dollar cost 71.60 Japanese Yen), you would borrow 100,000 worth of Australian Dollars and purchase ¥71,600,000. If the AUD did weaken and the price for the pair fell to 69.90, you would sell your Yen and pay off the loan to your broker and have ¥1,700,000 in profit, which would be converted to whatever currency you trade in and credited to your account (in US Dollars you might get $17,000, in Euros you might get €13,000).

Now, when you borrow money from your broker to buy or sell a currency pair, you will pay or receive interest on the loan, depending on the difference between the two countries' interest rates. This is called Carry or Roll For a more exhaustive discussion of the Foreign Exchange Market from Wikipedia, click here.

I hope that helps clear up some confusion on why currency is traded in pairs. As always - Happy Trading!